Question
February27, 2007
MichaelVerne
Senior Compliance Specialist
Premerger Notification Office
Bureau of Competition
FederalTrade Commission
Washington,DC
Re: FORMATION OF A NEWCO LIMITED LIABILITY COMPANY
Dear Mr. Verne :
On Monday, February 26, 2007 we had adiscussion regarding the formation of a new, limited liability company("LLC") pursuant to section 801.50 of the HSR rules of practice, 16C.F.R. section 801.50. I am hereby writing to memorialize our discussion andthe opinion you provided at that time.
FACTS:
Companies X and Y intend to form an LLC. X willcontribute cash and assets that constitute an on-going business unit in theservice industry. Very limited hard assets will be contributed by X. Y willcontribute its on-going business unit that also provides services. In returnfor their respective contributions, X will receive a 45 percent interest in theLLC profits and assets upon dissolution and Y will receive a 55 percentinterest in the LLC profits and assets upon dissolution. The size requirementsfound in section 801.50 of the HSR rules of practice will be met.
HSRRULES of PRACTICE:
Section 801.50 of the HSR rules of practice, entitled"Formation of unincorporated entities", governs the formation of bothLLCs and partnerships. Pursuant to that section the formation of an LLC isreportable if a forming person obtains "control" of the LLC and thesize tests found therein are met, unless an exemption is applicable to the formation."Control" is defined in section 801.1(b) of the rules relating to anLLC as a right to either 50 percent, or more, of the profits of the entity orhaving the right to 50 percent, or more, of the assets upon dissolution.
In regard to possible exemptions, section 802.4(a)provides for an exemption from the filing requirements based upon any exemptionfound within the HSR Act or any of the HSR rules of practice as long as theentity does not have non-exempt assets meeting or exceeding the HSR thresholdthen in effect. I noted that cash is not considered to be an asset pursuant tosection 801.21 of the rules, and, pursuant to section 802.30(c) any assetscontributed by an acquiring person to the new entity are assets whose acquisitionby that acquiring person are exempt from the requirements of the HSR Act. Thus,an acquiring person would not be required to include assets it contributes asnon-exempt assets at the time of formation of the LLC.
ANALYSISand CONCLUSION:
Because X is only acquiring a 45 percent interest inthe LLC, it is not obtaining "control" of the LLC and therefore, neednot file under HSR for its initial acquisition of LLC interests. If X acquiresadditional interests in the future which afford "control" of the LLCit will need to determine at that time whether it must file a premergernotification and report form.
Because Y is obtaining a 55 percent interest in theLLC it is obtaining "control" of the LLC and will need to file unlessan exemption applies. In regard to exemptions, Y need not count itscontribution to the LLC in determining the amount of reportable assets that theLLC will hold based on the exemption found in section 802.30(c). In regard tothe contribution by X, the cash X contributes to the LLC is not considered anasset pursuant to section 801.21, and thus, Y need only determine the fairmarket value of the non-exempt assets of the on-going business that X iscontributing in order to determine if it is acquiring a reportable amount of non-exemptassets via obtaining "control" of the LLC. The fair market valuationpursuant to the rules must be made by the acquiring person's board ofdirectors, or its delegates, within 60 days of either a premerger filing orconsummation of the proposed transaction. In making the valuation, only thenon-exempt assets should be considered and if they in effect constitute abusiness unit, the valuation should consider their value as a going concern. Ifthe transaction is not consummated or filing made within 60 days of determiningthe fair market value, a new valuation of the non-exempt assets must be made.
Based on the information presented, you agreed thatthe analysis and conclusion correctly states the application of the HSR rulesof practice to the formation of the LLC and that Y would only need to file ifthe fair market value of the non-exempt assets being contributed by X anddetermined by Y, meet or exceed the minimum HSR threshold.
If you have any questions or if the letter does notaccurately present our discussion, please telephone me at (redacted). Thank youfor your time and consideration in this matter